1. CFA INSTITUTE
CFA Institute Research Challenge
Hosted by
Local Challenge CFA Society Cleveland
Youngstown State University
2. YOUNGSTOWN STATEUNIVERSITY
STUDENT RESEARCH CHALLENGE
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Signet Share Prices and News Flow
Acquisiton of Zales
Acquisition of Ultra
Nov. 2, 2012
Dow declined
1000 points
Sell off due
to high oil
supply
Definitive
agreement to
aquire Zales
Synergy
expectations
increase
Record
EPS 3rd
Signet Jewelers Ticker NYSE: SIG GICS: Consumer Discretionary Sector, Specialty Retail
SIC: 5944 NAICS: 448310 Headquarters: Akron, OH Incorporated: HM, Bermuda
Current Price: $129.32 (1/5/16) Target Price: $133.26 Recommendation: HOLD
Store Concentration in US and Canada
Company Profile (1/11/16)
Share price $126.18
52 Week
High/Low
$152.27/$114.97
Market Cap $10.04B
Shares
Outstanding
$79.53M
BETA 0.9759
Dividend Yield 0.69%
P/E 23.8
Avg. Vol. 3M $1,431,180
FY Ends 1/31/201
Next Earnings
Date
3/24/2016
Overview
We initiate coverage on Signet Jewelers LTD on January 11th
2016
with a recommendation of Hold with a target price of 131.81 based
on several factors:
Assurances
Our valuation methods return a weighted average target
share price of $131.81. The valuation method employed
were primarily a discounted cash flow model and a relative
multiple evaluation. The short term prospects of Signet
remain positive but we do anticipate slow growth in the
long term.
Improvement in profitability and operating efficiency as
well as improved leverage with increasing dividend
payments should return value to the shareholder in the short
to long term.
Management has aggressively pursued growth through
acquisition and branded and exclusive jewelry offerings
which positions the company as leader in the market. The
vertical integration strategy and key sourcing initiatives
drive long term security in the diamond and commodity
markets.
Economic outlook remains positive as the economy
experiences record low unemployment levels, low fuel
prices, high consumer confidence, and increased credit
spending.
Concerns
Weakness is also seen in Signet as key financial metrics
have slipped over the last two years. Mostly due to the
Zales acquisition and increased expense related to the
growth of the company.
Changes in consumer sentiment towards jewelry,
discretionary spending, credit availability, and movements
in commodity prices can all negatively affect Signet’s
profitability and solvency.
Valuation Multiples DCF
Price $139.87 $128.35
Weights 30% 70%
Target $131.81
3. Business Description
Signet Jewelers Limited (SIG/Signet) is the largest specialty retailer of
diamond jewelry by sales in the United States (US), Canada, and the United
Kingdom (UK). Signet was founded in 1949 and is headquartered in Akron,
Ohio. Signet pursues both organic growth and growth through acquisition. The
company recently acquired Ultra Stores (2012) and Zales (2014). Signet’s
management focuses on vertical integration driven by acquisition. Signet
currently operates in five segments: Sterling Jewelers division (61.0% of sales
and 133.03% of operating income), the UK Jewelry division (10.94% of sales
and 1.19% of operating income), Zales division which is comprised of the
Zales Jewelry segment (23.84% of sales (3.19%) of operating income) and the
Piercing Pagoda segment (3.97% of sales (0.32%) of operating income), and
Other (0.24% of sales and (30.71%) of operating income).
Properties
Signet operates primarily in the US, UK, and Canada. The company operates
2,900 stores in the US. The US serves as the leading market for Signet, and is
recognized as the greatest potential for growth in their “Vision 2020” plan.
The Zale acquisition increased stores by 82.2% in 2015. Excluding the Zale
acquisition, locations increased 1.9% with an increase in retail space of 4.4%
(measured in square feet). During 2015, Signet opened 95 stores, acquired
1,619 stores, and closed 99 stores. Signet primarily utilizes operating leases for
retail spaces. Depreciation and amortization of related assets is calculated on a
straight-line method.
Strategy
Signet Jewelers Limited set forth five strategic pillars in the “Vision 2020”
strategy:
· Maximize mid-market – The $40 billion US jewelry mid-market is the
principal market that Signet has targeted as a major source of growth for the
company. Signet only controls 20% of the market so they are pursuing brand
positioning efforts to match customer types with buying occasions and store
brands.
· Best in bridal – Bridal is 50% of annual sales for Signet. The company
has implemented many brands to maximize their exposure to customers
because strategic diamond sourcing is critical to compete. Vertical integration
in the diamond supply chain and several acquisitions allow Signet to provide
notable brands in the sector. Some of these brands include: Neil Lane Bridal,
Vera Wang Love, and Leo Diamond.
· Best in class digital ecosystem –Through strategic e-commerce, social
media “touch points” and a jewelry education site (jewelrywise.com) Signet is
able to have frequent communication with potential customers. In-store digital
ecosystems are providing streamlined search and navigation capabilities to
enhance consumer experiences.
· Expand footprint – Signet is currently the number one jeweler in the
US, UK, and Canada, but still has room to develop is several key
geographies. The company is committed to organic and acquisition growth
and looks to integrate between divisions to create a platform to support
existing and future growth.
· People, Purpose and Passion – Signet readily acknowledges personnel
being the most valuable asset of the company. Signet utilizes training
programs and pay-for-performance cultures to attract and retain employees.
Integration of employee training techniques across business segments allows
for greater synergies. Retention rates are unavailable and are not public
knowledge.
Diamonds and
Diamond
jewelry
63%
Gold and silver
jewelry,
including charm
bracelets
14%
Other jewelry
11%
Watches
12%
Total Signet Merchandise Mix
$-
$2,000.00
$4,000.00
$6,000.00
$8,000.00
Revenue
2%
2%2% 2%
1%
91%
Shareholder
Structure
Artisan Mid Cap Investor
Vanguard Mid Cap Index 1
Vanguard Total Stock Market
Index
Prudential Jennison Mid Cap
Growth A
Princpal MidCap R2
Other
4. Management and Governance
The executive management team’s objective is the sustainable enhancement of
business performance and shareholder value. The executive management team
is responsible for creating and implementing strategies that are in line with
Signet’s core goals, among, maintaining the wellbeing of its employees,
customers, and the surrounding community. Currently the executive
management team is relatively new with three members having experience over
10 years (Appendix C). Mark Light, CEO and Director, leads the executive
team with over 38 years of experience in multiple leadership positions in his
career at Signet.
Incorporated in Bermuda the company enjoys a zero percent corporate tax rate,
lenient corporate laws, and user friendly legislation. Audit, Compensation,
Nomination, Corporate Governance, and Corporate Social Responsibility
Committees have been put in place to continue the company's going concern.
Shareholders have one vote per common share. Common shares have rights to
dividends. 50% or more of the common share votes can amend a bylaw. The
company has established a stringent code of ethics to adhere to company goals,
government regulations, and laws.
Industry Overview and Competitive Positioning
Signet competes for revenue in the Consumer Discretionary Sector and within
the sub industry Specialty Retailing. The jewelry industry is highly fragmented
with many private companies and a few public ones. Additionally, there are
department stores, mass merchandisers, discount stores and apparel stores that
compete directly with Signet via their jewelry sales. Signet’s fiscal 2014 US
sales represent 4.8% of the Federal Reserve's reported $74 billion in combined
watch and jewelry revenues that year (up to 6.7% following the Zale
acquisition in 2015).
Signet targets the middle market consumer who spends between $100 and
$10,000 per jewelry purchase. Signet owns three of the four largest jewelry
retailers in the US. They also own and operate the #1 jewelry retailer with 145
retail stores in Canada, earning $105.4 million in Fiscal 2015. The company
operates the top two jewelry retailers in the UK, H. Samuel and Ernest Jones
earning $743.6 million (US converted dollars) during fiscal 2015.
Marriage and seasonal purchases drive the sale of jewelry. Signet reports 50%
of sales comes from its bridal division. Sales of Signet dropped during the
Great Recession as jewelry purchases are driven primarily by consumer
confidence, employment, disposable income and available credit.
Current State of US Economy
Despite the market’s current volatility and a lackluster opening to the year, the
United States is experiencing consistent and steady growth in its economy. In
the past five years, real Gross Domestic Product (rGDP) has grown on average
by 2.05% and real disposable income has grown 1.5% indicating a changing
but growing economy. Additionally, American consumers are able to take
advantage of the extra disposable income generated from lower gas and oil
prices to either spend, save, or invest. Consumer confidence, noted as a high
risk by Signet in their 10K, has grown on average 0.45% since 2010.
Factors that affect growth
Signet Jewelers total sales positively correlate most strongly with personal
consumption expenditure, real GDP, and employment respectively and assist in
our forecasts. The consistent lack of strong predicting factors between sales and
multiple macroeconomic factors indicate that regional and local economies
may have a higher impact on Signet’s sales. They may provide more insight in
forecasting changes in sales based on changes in local and regional economies.
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1991
1993
1995
1997
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PercentChange
Personal Consumption Expenditure,
rGDP, Employment Rate
Personal Consumption Expenditure
rGDP
Employment
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inBillions
Projected rGDP
rGDP Projected rGDP
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Disclosure &
Transparency
Executive
Management
Board of
Directors
Rights
Shareholders
Takeover
Defense
Corporate Governance
3
3.5
4
Strength
Average
Weakness
Average
Opportunities
Average
Threats
Average
SIGNET JEWELRS LIMITED
SWOT ANALYSIS
5. Government regulation
For protection of the customer, the Federal Trade Commission (FTC) created
the Jewelers Vigilance Committee (JVC) to oversee the industry and protect
the consumer. Two important regulations that Signet must adhere to involve
the quality of marking and informing customers as to their use of conflict
diamonds. It is also illegal for companies to purchase diamonds from certain
countries.
Competitor Analysis
Signet competition includes small private regional retailers, big box stores such
as Walmart and Costco, and department stores such as Macy's and Kohl’s. This
makes comparison of operating efficiency complicated. Tiffany’s targets
higher end customers while Signet targets the mid-market consumer. However
Signet does compete directly with online retailers such as Blue Nile, the largest
online jewelry retailer. S&P Capital IQs industry report states online retail
sales have grown at a CAGR of 14% during the five-year period from 2009-
2013 while brick and mortar have only managed a 2% CAGR during the same
period. Signet's expertise and personal care is a huge competitive advantage.
Trends
Trends that are affecting the industry include globalization of sales and
suppliers, technology, and demographics including the aging of the baby
boomers. Omni Channel retailing, Ecommerce, Mcommerce (mobile
commerce), and social media commerce is changing the way people shop.
Signets ability to deliver successful technology systems that will drive multi-
channel sales will be a key factor in the company’s future success. Closely
related, is consumers preference for online research, but in-store
purchase. Signets ability to provide consumer friendly information on its
websites and positive in store interactions should help them compete in the
future. Signet estimates that 90% of jewelry purchases are made in-store.
Impact of Marriage Rates on Sales
Over half of Signet’s revenue is dependent on bridal jewelry sales. Any
disruption in this market segment will lead to a notable negative impact in
revenue. Over the past four years, outstanding student loans have increased on
average by 1.6% with an 8% growth rate from 2013-2014. Analysis shows that
if the volume of outstanding student loans increases, marriage rates will
decrease respectively. Please refer to Exhibit. Marriage rates are down nearly
60% since 1970 with no foreseeable significant growth in the future. Signet
Jewelers found that despite their marital market segment shrinking, customers
are spending more per purchase.
Diamond Supply and Supply Chain
Diamonds represent 45% of COGS. Signet purchased a Diamond polishing
company in Gaborone, Botswana consistent with their vertical integration
strategy. The company is a Rio Tinto “Daimanataire”, which gives them access
to an allocated amount of rough diamonds. Signet is also a De Beers
SightHolder which further gives them a competitive advantage over their rivals
such as Blue Nile who does not have these credentials. (See Appendix K) for
more information.
Investment Summary
The recommendation to “Hold” Signet Jewelers equity is based on multiple
factors, including findings from our discounted cash flow analysis and a
relative multiples valuation. Industrial trends, projected economic growth, and
other significant factors are highlighted below.
Signet’s size and vertical integration strategy
Signet, with its fleet of nearly 3,000 stores, is the largest jewelry retailer by
sales in the US, UK, and Canada. Having exposure to these markets allows
Signet to gain traction through advertising and physical
presence. Management has pursued supply-side vertical integration through
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4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
2010 2011 2012 2013 2014
PercentChange
Marrige Rates, Signet Annual Sales
(Less Zales), and Outstanding
Student Loans
Student Loans Outstanding
Signet's Annual Sales
Marriage Rate
Sterling
Jeweler
s
66%
Zale
Jewelry
19%
Piercing
Pagoda
2%
UK
Jewelry
13%
Other
0%
Total Sales
y = 0.9759x + 80.357
R² = 0.9437
0
50
100
150
200
250
0 50 100 150 200
SIG and S&P 500 Beta
Regression
6. the acquisition of diamond mines and secured long-term diamond sourcing
through close supplier relations. These factors contribute to the continued
growth and expansion of Signet’s market share.
Potential Improvement in Margins and Operations
Signet’s margins have contracted slightly since the Zales acquisition.
We have forecasted slow revenue growth but there is ample room to improve
on the margins, which will positively impact Signets EPS. This increases the
ability to provide more value to the shareholder together with increased
dividends and share repurchases.
Global and Domestic Growth
Signet’s share of sales made by specialty jewelry retailers was 10.6% in 2013.
These sales are strongly correlated with personal consumption expenditure
rates. Personal consumption expenditure rates correlate strongly with rGDP
growth and employment rates. For every one percent growth in rGDP, there
may be a corresponding increase of $8,257 million dollars in personal
consumption expenditure (Please Refer to Appendix I). Household
consumption expenditure is also positively correlated to Signet’s UK sales.
Over a time span of ten years, household consumption expenditure has
increased 1.05% on average. These bode well for Signet sales both
domestically and abroad.
Concerns
Setbacks from Zale’s Integration
Since the Zales acquisition the company has suffered deteriorating margins. A
key growth driver will be synergies, or lack thereof, realized by Signet going
forward. Management expects to realize synergies in the near term. We hold
that the company will increase efficiencies, but are unconvinced that they will
achieve managements projected targets.
Increasingly fragmented jewelry industry
Signet has grown through increasingly large acquisitions over time. However,
this has left the market somewhat consolidated with Signet being the largest
player and the rest of the industry being small and fragmented. Acquisition
targets will be hard to come by as the majority of the market consisting of
companies with smaller footprints. Growth through acquisition will be slow
and that reaffirms our long term growth figure of 4.5%.
Changes in consumer taste and sentiment
Signet's sales are highly dependent on the consumer's view of jewelry. The
inability to deliver products customer’s desire could adversely affect their
business. Adapting to a changing market by maintaining high levels of
desirable merchandise will be one of these keys to success and also one of the
risks.
Dependence on credit sales and discretionary income
65.6% of Sterling sales ($2.277 million) in fiscal 2015 were made on credit.
This reliance on credit financing to drive sales is particularly troubling. Any
change in credit regulations, availability of credit, deterioration of the credit
industry, and extreme rises in interest rates could negatively affect Signet’s
sales.
Valuation
Methods employed
Our valuation methods consisted of a discounted cash flow model (DCF), a
relative multiples consisting of an EV/EBITDA, EV/EBITDAR, a forward
revenue multiple, and a valuation method based on the Zales acquisition.
Heavier weight was placed on the DCF model and the forward EV/EBITDA
with 70% and 30% weights respectively.
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2018
inBillions
Projected Personal Consumption
Expenditure
Personal Consumption Expenditure
Projected Personal Consumption Expenditure
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
$-
$2.00
$4.00
$6.00
$8.00
$10.00
Dividend, EPS, and
Dividend Yield
Dividend per share
EPS
Dividend Yield
$-
$0.50
$1.00
$1.50
2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6
DIVIDEND PER SHARE
Dividend per share % change
Sterling
Jeweler
s, 624.3
UK
Jewelry
, 52.2
Zale
Jewelry
, -1.9
Piercin
g
Pagoda,
-6.3
Other, -
91.7-200
-100
0
100
200
300
400
500
600
700
Operating Income
7. DCF Model
Our use of a DCF model was used over a traditional dividend discount
model due to the lack of substance in dividends paid by the target company.
A variable growth rate was also used in order to better reflect our
assumptions over the horizon, terminal, and thereafter periods. As a starting
point for sales growth we adjusted 2015 sales upwards to reflect the four
months that did not contain Zale’s sales. Our cash flows are calculated as
the excess cash after investments in net working capital (NWC) and capital
expenditures (CAPEX) to support the growth of the company. Our DCF
model returned an intrinsic value of $128.35 per share representing a 1.72%
upside from our valuation date of Monday January 11th, 2016. More
information can be found in the (Appendix G)
WACC
The weighted average cost of capital was calculated using traditional
financial methods. We show an 8.01% cost of equity, driven down by a low
market risk premium. Furthermore, Signet has advantageous credit facilities
and debt instruments, driving the cost of debt down to 2.49%. The overall
weighted average cost of capital is 7.26%, given a 13% weight of debt and
87% weight in equity.
Relative Multiples Valuations
Of the numerous multiple valuations calculated we weighted our forward
EV/EBITDA multiple highest returning an intrinsic value of $139.88 per
share. Empirical research shows that forward multiples are better predictors
of value than historical. Our valuation methods, DCF and forward
EV/EBITDA are consistent with each other in their forward looking nature.
We also choose to calculate historical multiples that represents a 2.01%
upside for current multiples for EV/EBITDA. This follows our DCF share
price of $128.35 and reaffirms our hold recommendation.
We also calculated an EV/EBITDAR multiple to adjust for the significant
operating lease expenses incurred by both Signet and Tiffany & Co. We
capitalized operating leases as debt and added this figure into our enterprise
value. The operating leases were discounted at the cost of debt for Signet,
2.49%. (See appendix F for more information)
Valuation Based on Relative Acquisition
Another valuation method used in the financial industry is valuation based
on a recent merger or acquisition of companies in the same industry. Our
analysis of the Zales acquisition reveals an EV/EBITDA multiple paid of
19.71X. Applying this multiple to Signet's fiscal 2015 EBITDA produces a
share price of $151.36. We believe this figure overestimates Signet’s
intrinsic value but is telling in what an investor hoping for a buyout of
Signet could expect to receive as compensation for their shares.
Revenue Growth
Revenue growth in 2015 was 36.28% including Zales sales, but organic and
same store growth was only 7.38%. Our 2016 full year outlook expects
13.95% revenue growth. However, much of the growth is due to the full
year revenues generated by the Zales acquisition. In fiscal 2015 Signet only
included 8 months of Zale’s total sales. Signet’s 5 year CAGR is 6.67%
which we feel represents more realistic growth potential in the current
market. The next 4 years we see Signet’s growth falling from a 6.67% high
in 2017 to a terminal rate of 4.5% in 2020.
Terminal Growth
Years five through ten should consist of modest growth generated through
both acquisition, increased market penetration, and organic growth through
branded and exclusive jewelry. As the market becomes smaller and more
consolidated we see Signet’s growth following overall economic expansion
as measured by the average five year growth rate of rGDP at 2.05%.
Average EV from
Forward EBITDA
Multiple
$12,580,743,949.23
Less: Debt $1,461,300,000.00
Equity Value $11,119,443,949.23
Shares Outstanding $79,500,000.00
Intrinsic Per Share
Value
$139.87
Zales EV at time
of Purchase $1,488,303,000.00
Purchase Price
by Signet $1,458,000,000.00
Multiple Paid by
Signet 19.71X
Signets Fiscal
2015 EBITDA $702,600,000.00
EV Based off
Zales Multiple $13,848,246,000.00
Less: Debt
$1,815,100,000.00
Equity Value
$12,033,146,000.00
Shares
Outstanding 79,500,000.00
Intinsic Per
Share Value $151.36
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millions
Hisorical & Projected Free
Cash Flows
WACC
Risk Free Rate 2.70%
S&P 500 Beta regression 97.59%
MRP 4.88%
Size Premium 0.63%
Cost of Equity 8.09%
Debt Weighted cost 2.49%
Weighted Tax Rate 30.65%
After Tax Cost of Debt 1.73%
Market Value of SE (%) 87.00%
Market Value of Debt (%) 13.00%
WACC 7.26%
8. Price target and range
We place a price target of $131.81 on Signet which take into account our
weighting of 70%-30% DCF to forward EV/EBITDA. This represents a
1.72% increase over January 11ths trading price of 126.18. Using guidance
from our multiples and +/- 15% as a basis, we put low target of $112 and
high target of $152.
Financial Analysis
Income Statement Analysis
Signets compound annual growth rate (CAGR) for the last five years is
6.67%, without Zale’s sales. With Zale’s sales CAGR stands at 11.87%.
This is substantially higher than most of Signets competitors. Signets ability
to generate increased sales through national advertising campaigns,
exclusive branded jewelry, and competitive pricing gives it an edge. Though
we see Signets revenue growth peaking next year and declining steadily
towards a terminal growth rate of 4.5%, Signets ability to drive acquisitions
will be its main propeller of growth in the years to come. (Historical and
projected financial statements can be found in Appendix B)
Fiscal 2015 was a dynamic year for SIG as revenues increased by 36%, but
increases in gross, operating, and net profit lagged. Margins decreased
across the board. This was due to the inefficiency in the Zale’s integration
and the negative contributions to the bottom line from certain operating
segments. Selling, general, and, administrative expenses outpaced revenue
growth and were most likely due to the increases in wages and salaries,
information technology, eCommerce, and increased advertising costs
consistent with Signet’s expanding national advertising network. Our
projections see Signet improving across all lines as they effectively
integrate Zales.
Signet’s “other” operating income is generated by interest earned through
the in house consumer financing program. In house credit is only extended
to Sterling customers while other segments do not offer in credit financing.
Average outstanding credit account balances have risen consecutively over
the last three years as overall credit transactions as a percentage of sales has
increased also. This means that consumers are using more credit to make
more purchases and can be a signal that customers feel confident in the
economic outlook thus spending more on credit. Our research on consumer
confidence and increased credit spending in the economy as a whole
supports this. Zales provides customers with third party financing options
through private label credit cards. These offerings help Zales make sales
that account for 40% of overall revenue in 2015. Signets ability to drive
credit sales and interest income is a competitive advantage that helps them
generate extra revenue.
Efficiency
DuPont Analysis
Since 2013 ROE has been deteriorating due to declining profit margins and
is at lowest level in 4 years in spite of financial leverage providing a big
boost. However, we see ROE improving in the near term before slight
contraction as growth wanes and Signet loses financial leverage.
$0.00
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$2,000.00
$2,500.00
Unadjusted Sales v Seasonally
Adjusted Sales
in Millions
Total Quarterly Sales
Seasonally Adjusted Sales
Sterling’s In House Credit Snapshot in
Millions
Year 2015 2014 2013
Credit Sales $2,277 $2,028 $1,863
Net Bad debt
Expense $ 160 $ 138 $ 122
% of Sterling
Sales 60.50% 57.70% 56.90%
Avg. Acct.
Balance $1,245 $1,175 $1,110
Inc. from credit $ 218 $ 186 $ 160
(1)NPM (2) TAT (3) ROI (4)FL (5)ROE
2010 4.80% 1.075109 5.16% 1.787333 9.22%
2011 5.83% 1.112499 6.49% 1.593502 10.34%
2012 8.65% 1.038157 8.98% 1.584573 14.23%
2013 9.03% 1.071094 9.68% 1.596206 15.45%
2014 8.74% 1.044674 9.13% 1.572003 14.36%
2015 6.64% 0.906552 6.02% 2.251494 13.56%
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1-Jul-15
Sales by Division
Sterling Jewelers division
UK Jewelery division
Zales
Percing Pagoda
9. Investment Risks
Exposure to Economic Risks
Signet’s sales are predominantly driven by discretionary spending as
jewelry maintains the perception of being a “luxury good”. 40% of Signet's
sales come in the fiscal fourth quarter (November 1st to January 31st).
Jewelers refer to this period as the “White Christmas” with 20% of all
brides become engaged in December. The seasonality of Signet’s sales are
evident when charted (Exhibit ()), showing rising magnitude with each
cycle. Specialty retailers may be susceptible to shifts on cultural, lifestyle,
and demographic trends that would in turn affect discretionary spending.
Credit Financing Programs
More than half of Signet’s sales in the US and Canada utilize in-house
customer financing programs or third-party financing programs. If the
market experiences a downturn or if private household debt rises to the
point that customers cannot utilize the credit programs, Signet’s will
experience a drop in overall sales.
Foreign Exchange Risk
The company has experienced increased exposure from exchange risks,
fueled by adverse movement of the US dollar to £ Pound and US dollar to
Canadian dollar exchange rates. The Zale division cost of goods sold has
significant exposure to US dollar to Canadian dollar movements. Signet
estimates that 17% of goods purchased in the Zales division are
denominated in Canadian dollars. Signet generated 83% of sales and 91% of
its operating income in US dollars in fiscal 2015.
Volatility in Commodity Prices
In total, diamonds account for 45% of Signet’s merchandise cost and gold
accounts for 15%. The company expects demand for diamonds to outpace
supply, due to increasing demand from China and India. The strategic
sourcing of diamonds by Signet has reduced the impact of fluctuations in
commodity price. However, any supply limitation will negatively impact a
large segment of the cost of goods sold for Signet. Fine gold and loose
diamonds account for roughly 16% and 43% respectively, of the
merchandise cost of goods sold for the Zale division. Fine gold and loose
diamonds account for about 15% and 10% respectively, of merchandise cost
of goods sold for the UK Jewelry operating segment. The company is also
exposed to the UK pound to Swiss franc exchange rate. The UK Jewelry
operating segment primarily purchases watches that are influenced by the
pound to franc exchange rates. Approximately 20% of goods purchased
under the UK division are made in US dollars, meaning the dollar to pound
exchange rate has an indirect impact on the UK Jewelry division’s cost of
goods sold.
Importance of Cyber Security
Over the past ten years, the retailing industry has fallen victim to multiple
corporate hacks and data breaches- Target, Home Depot, and EBay are
prominent examples. With Signet Jewelers conducting a majority of their
customer transactions through in-house financing, data security must be a
priority. Any breaches in the Signet’s secure network will negatively impact
sales and stock price.
brides become engaged in December. The seasonality of Signet’s sales are
evident when charted (Exhibit ()), showing rising magnitude with each
Inventory Management
Inventory turnover is a constant focus in retail industry. S&P Capital IQ
reports inventory turnover in the consumer discretionary area at 70 days.
Signet inventory turnover is around 365 days. Higher priced goods typically
have a lower turnover rate than inexpensively priced goods. Too little
inventory can lead to missed sales and too much inventory can lead to write
downs and product discounts. Signet states that it uses dollar cost averaging
in purchasing commodities on a monthly basis. This helps Signet maintain
consistent COGS in relation to its gold and diamond costs. Signet also hold
a majority of their jewelry on consignment. Consignment merchandise is a
way to mitigate the risk of owning their products with $434.6 million of
fiscal 2015 being held this way. Signet can return any merchandise held on
consignment without cost or recourse. Signets ability to effectively manage
inventory is a key success factor in the retail business as write downs,
obsolescence, defective items, and shrinkage greatly affect the bottom line.
Signets ability to adapt to a changing market by maintaining high levels of
desirable merchandise will be one of these keys to success and also one of
risks. Signet owns more exclusive branded jewelry than any other major
competitor and is developing more relationships as time goes. Management
has been effective in securing branded and exclusive jewelry over time with
its exclusive portfolio growing.
Liquidity
We anticipate negative free cash flow for 2016 as investments in CAPEX
have outpaced cash gains. CAPEX has increased the last three years at an
increasing rate. We see increases in A/R, Inventories, and A/P which is
consistent with a growth company.
Signet displays a conservative financing strategy with cash alone exceeding
all short term debt. Additionally, the company used long term debt to
finance the Acquisition. Management seeks to increase payments on long-
term debt in order to maintain a 3.5x or below adjusted debt/adjusted
EBITDAR. The ratio per the 2015 annual report was 4.0x, suggesting no
long-term debt will be issued in 2016. Signet’s liquidity was stable from
2010 to 2014, but deteriorated in 2015 based on the Zales acquisition.
Signet’s liquidity will continue to improve as they pay down debt, which is
expected by 2018-19. The company has been effective at limiting their risk
as a going concern through limited debt levels and very advantageous debt
offerings (SEE APPENDIX M)
Segment Analysis
Our analysis of the five operating segments of Signet is both positive and
negative. Over all Signets flagship brands under the Sterling and UK
segments performed well while the performance of the Zales, Piercing
Pagoda, and other dragged down the lines across the board. This analysis
supports our hold rating with key highlights below:
Increased sales in the flagship brands of the Sterling Division
Net store closings and declining revenue from Sterling's regional
brands
Improvements in sales from 14’to 15’in the UK division
Average transaction value and total transactions are increasing;
however some are increasing at a decreasing rates
Effects of exchange rates have negatively impacted UK sales and
with the strengthening dollar it only stands to be impacted more.
Overall Signet’s financial condition is very stable. We feel improvements
can be made across all lines and believe Signets management will be
effective in doing so.
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Consumer Credit Outstanding in
Percent Change
Contribution of Revenue by Segment
Segment
Total
Assets
ROI
Cap
Ex
YoY
Growth
OI
Sterling
Jewelers
57.64%
9.87%
158
4.80%
108.30%
UK
Jewelry 6.53% 0.82% 20.2 5.30% 9.00%
Zale
Jewelry
30.08% -
0.03%
35.1
1.50%
-0.30%
Piercing
Pagoda
2.10% -
0.10%
6.9
0.20%
-1.10%
Other
3.64% -
1.45%
0.4 -15.90%
Total
100%
9.11%
220
4.10%
$-
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
2010
2011
2012
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
2021ETotal Assets Total Debt
0
1000
2000
3000
4000
5000
6000
7000
201020112012201320142015
Total Debt to Equity
Total Debt Total Common Equity
10. 2011 2012 2013 2014 2015
-
200.00
400.00
600.00
800.00
1,000.00
1,200.00
1,400.00
1,600.00
1,800.00
Gold Prices to COGS
Gold Price
COGS
Operating Margins
Investment Risks
Signet’s sales are predominantly driven by discretionary spending as
jewelry maintains the perception of being a “luxury good”. 40% of Signet's
sales come in the fiscal fourth quarter (November 1st to January 31st).
Jewelers refer to this period as the “White Christmas” with 20% of all brides
become engaged in December. The seasonality of Signet’s sales are evident
when charted (Exhibit ()), showing rising magnitude with each cycle.
Specialty retailers may be susceptible to shifts on cultural, lifestyle, and
demographic trends that would in turn affect discretionary spending.
Credit Financing Programs
All divisions of Signet, with the exception of Sterling Jewelers, use third
party financing programs. More than half of Signet’s sales in the US and
Canada utilize in-house customer financing programs or third-party
financing programs. If the market experiences a downturn or if private
household debt rises to the point that customers cannot utilize the credit
programs, Signet’s will experience a drop in overall sales.
Foreign Exchange Risk
The company has experienced increased exposure from exchange risks,
fueled by adverse movement of the US dollar to £ Pound and US dollar to
Canadian dollar exchange rates. The Zale division cost of goods sold has
significant exposure to US dollar to Canadian dollar movements. Signet
estimates that 17% of goods purchased in the Zales division are
denominated in Canadian dollars. Signet generated 83% of sales and 91% of
its operating income in US dollars in fiscal 2015.
Volatility in Commodity Prices
In total, diamonds account for 45% of Signet’s merchandise cost and gold
accounts for 15%. The company expects demand for diamonds to outpace
supply, due to increasing demand from China and India. The strategic
sourcing of diamonds by Signet has reduced the impact of fluctuations in
commodity price. However, any supply limitation will negatively impact a
large segment of the cost of goods sold for Signet. Fine gold and loose
diamonds account for roughly 16% and 43% respectively, of the
merchandise cost of goods sold for the Zale division. Fine gold and loose
diamonds account for about 15% and 10% respectively, of merchandise cost
of goods sold for the UK Jewelry operating segment. The company is also
exposed to the UK pound to Swiss franc exchange rate. The UK Jewelry
operating segment primarily purchases watches that are influenced by the
pound to franc exchange rate. Approximately 20% of goods purchased
under the UK division are made in US dollars, meaning the dollar to pound
exchange rate has an indirect impact on the UK Jewelry division’s cost of
goods sold.
Importance of Cyber Security
Over the past ten years, the retailing industry has fallen victim to multiple
corporate hacks and data breaches- Target, Home Depot, and EBay are
prominent examples. With Signet Jewelers conducting a majority of their
customer transactions through in-house financing, data security must be a
priority. Any breaches in the Signet’s secure network will negatively impact
sales and stock price.
0
1
2
3
4
5
Bargaining
Power of
Customers
Threat of
Entrants
Threat of
Substitutes
Bargaining
Power of
Suppliers
Intensity of
Competitive
Rivalry
Porter's Five Forces
GOLD PRICE HISTORY 1
GOLD PRICE HISTORY 2
$1,000.00
$1,200.00
$1,400.00
$1,600.00
$1,800.00
$2,000.00
11'January
September
May
13'January
September
May
15'January
September
11. Disclosures:
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report does not hold a financial interest in the securities
of this company.
The author(s), or a member of their household, of this report does not know of the existence of any conflicts
of interest that might bias the content or publication of this report.
Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as an officer or director:
The author(s), or a member of their household, does not serve as an officer, director or advisory board
member of the subject company.
Market making:
The author(s) does not act as a market maker in the subject company’s securities.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public
and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty,
express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis
of any investment decisions by any person or entity. This information does not constitute investment advice,
nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to
be a recommendation by any individual affiliated with CFA Society of Cleveland, CFA Institute or the CFA
Institute Research Challenge with regard to this company’s stock.
CFA INSTITUTE
12. Appendix A: Glossary
Glossary
Acquisition Valuation Method Determines range of possible prices for acquisition
candidate
CAGR Compound annual growth rate
CAPEX Capital expenditures
COGS Cost of goods sold
Correlation Statistical technique showing whether and how strongly
variables are related
DCF Discounted cash flow analysis- method of valuing
company using time value of money
Discretionary Spending Consumer spending on non-essentials
EV/EBITDA (Enterprise Multiple) Ratio used to determine value of company by taking
enterprise value divided by earnings before interest ,
taxes, depreciation, and amortization
EV/EBITDAR Non-GAAP indicator of company’s financial performance
by dividing enterprise value by earnings before interest,
taxes, depreciation, amortization, and rent costs
Forward Revenue Multiple Multiple applied to a company’s next twelve months of
EBITDA or EBIT
FRED Federal Reserve Economic Data
FTC Federal Trade Commission
Intrinsic Value Actual value of company based on underlying perception
of true value
Inventory Turnover Cost of goods sold divided by average inventory
JVC Jewelers Vigilance Committee
Linear Regression Analysis Approach for modeling relationship between dependent
variable (y) and independent variable (x)
Mcommerce Mobile commerce
NOA Net operating assets exclude cash, investment in securities
and financing activities
NOPM Net operating profit margin
Organic Growth Growth rate company achieves by increasing output and
enhancing sales
Personal Consumption Expenditure Measure of actual and imputed expenditure of households
rGDP Real gross domestic product- value of economic output
adjusted for price changes
S&P Capital IQ Research and analysis company that offers software to
investment managers
Seasonally Adjusted Sales Sales that are adjusted for seasonal patterning
SIG/Signet Signet Jewelers Limited
Synergy Concept that the value and performance of two
companies’ combined will be greater than the sum of the
separate parts
The Acquisition Refers to the Zales acquisition
Vertical Integration When company expands business into areas that are
different points on the same production path
WACC Weighted average cost of capital
16. Appendix C: Corporate Governance: SSI
Disclosure and Transparency - 2
Annual report dates back 6 years, to 2010.
Well engineered website allowing viewer to view reports from as far back as 1997.
Multiple revisions to 10-K, 10-Q, and 8-K reports.
Executive Management - 3
The Executive management team is quiet new, with the two members having over 10 years of experience. The
ability to use the experience members and to help guide the inexperience members will be key as the company
moves forward into the future.
Board of Directors - 2
All directors have a wide variety of experience in the business spectrum.
More than 80% of the Board of Directors is independent.
Rights and Obligations of Shareholders - 2
Out of all outstanding shares 79.4m shares have voting rights
Requires 50% of shareholder vote to amend company bylaws
Takeover Defense - 2
Incorporated in Bermuda due to sound English common law principles. Bermuda is tax neutral (0% corporate
tax rate). Partnership between government and private sector. Legislation is user friendly.
Score: 2/5
Our rating is in line with the Institutional Shareholder Service (ISS) Rating Methodology.
Criteria Risk
Board Structure Medium
Shareholder Rights Low
Compensation Medium
Audit & Risk Oversight Medium
SSS Rating Medium
Key
1 Insignificant threat to shareholders
2 Low threat to shareholders
3 Moderate threat to shareholders
4 Significant threat to shareholders
5 High threat to shareholders
17. Appendix D: Key Employees and Board of Directors
Board of Directors
Members Title Independent Career Background Tenure
Mark Light,
53
CEO and
Director
No
Was appointed to the Board in October 2014. Mr. Light joined the Company in 1978
as an in-store sales associate in the Sterling division and became Chief Executive
Officer and a Director on October 31, 2014.
38
H. Todd
Stitzer. 63
Chairman No
Been Chairman of Signet since June 2012. Mr. Stitzer is a Director of privately held
Massachusetts Mutual Life Insurance Company and a member of the advisory board
of Hamlin Capital Management, a privately held investment advisory firm.
4
Virginia C.
Drosos, 52
Director Yes
President, CEO and a Director of Assurex Health and a director of American Financial
Group Inc.
Dale W.
Hilpert, 72
Director Yes
Was Chief Executive Officer of Williams-Sonoma, Inc. from April 2001 until his
retirement in January 2003.
Helen E.
McCluskey,
59
Director Yes Was appointed as a Director of Avon Inc in July 2014.
Marianne
Miller
Parrs, 71
Director Yes
Director of Stanley Black & Decker, Inc. (previously The Stanley Works Inc.) and
CIT Group Inc.
Thomas G.
Plaskett, 71
Chairman Yes
Been Chairman of Fox Run Capital Associates, a private consulting firm focusing on
financial advisory and corporate governance services for emerging companies, since
1991.
Robert J.
Stack, 64
Director Yes Been a Director of publicly held IMI plc since 2008.
Eugenia M.
Ulasewicz,
61
Director Yes
Director of Bunzl plc and Vince Holding Corp. She was President of Burberry Group
plc’s American division, responsible for the US, Canada, Latin America, Central and
South America until her retirement in March 2013.
Russell
Walls, 71
Chairman Yes
Director of Biocon Limited, Mytrah Energy Limited, Aviva Italia Holding S.p.A., and
Chairman of Aviva Life & Pensions UK Limited.
Key Executives
Executive Title Description Tenure
Steven
Becker, 58
Chief Human
Resources
Officer
Joined the Sterling Jewelers Division in 2005 as Senior Vice President, Human Resources and
was promoted to Chief Human Resources Officer for Signet in May 2014.
11
Shaun
Carney, 49
UK division as
Finance Director
Joined Signet’s UK division as Finance Director in September 2013. Previously, Mr. Carney
held a number of senior financial positions, most recently at HMV plc since March 2006.
3
Lynn
Dennison,51
Risk and
Corporate
Affairs Officer
Joined the Sterling Jewelers Division in January 2011 as Senior Vice President, Legal,
Compliance and Risk Management and was promoted to Signet Chief Legal, Risk and Corporate
Affairs Officer in December 2014.
5
James
Garlish, 46
Senior Vice
President,
Finance Zale
Division
Promoted to Senior Vice President, Finance Zale Division in November 2014 having previously
been Vice President of Corporate Planning since December 2011.
2
Sebastian
Hobbs, 45
Managing
Director of
Signet’s UK
division
Became Managing Director of Signet’s UK division in July 2013 having been appointed
Commercial Director of the UK division in March 2011.
3
Eb Hrabak,
59
Chief Operating
Officer
Was promoted to Signet Chief Operating officer in July 2015, having previously been President
of Sterling Jewelers Division since July 2014.
1
Mark
Jenkins, 57
Chief
Governance
Officer
Has been Corporate Secretary since 2004 and Chief Governance Officer since December 2014.
He was Chief Legal Officer from September 2012 until December 2014.
12
George
Murray, 59
Chief
Merchandising
and Marketing
Officer
Was promoted to Signet Chief Merchandising and Marketing Officer in July 2015 having
previously been President of the Zale Division since July 2014.
2
Michele
Santana, 44
Chief Financial
Officer
Became Chief Financial Officer of Signet in August 2014, having previously been Senior Vice
President and Financial Controller since October 2010.
6
Robert
Trabucco, 60
Executive Vice
President of
Finance
Was promoted to Signet Executive Vice president, Finance, in July 2015. He will continue to
serve as the Sterling Jewelers Division Chief Financial Officer.
1
Uta Werner,
56
Chief Strategy
Officer
Joined Signet Jewelers in the fall of 2015 as Chief Strategy Officer. Prior to joining Signet, Ms.
Werner was Executive Vice President, Global Product Leadership at Nielsen.
1
Source: Company's Website
18. Appendix D: SWOT Analysis
Economies of Scale – Signet is a large company owning most of
the big name brand jewelry stores. A big advantage for gaining
consumers.
Innovation and Merchandise – Signet has kept up their
competitive advantage with new products. Recent products
include the Ever Us and dancing diamond.
Customer Service – Signet prides themselves on having
employees who care and have a relationship with customers.
In House Credit – Signet offers customers the option to pay for
their diamond later.
Advertising Campaign – Signet puts a lot into making sure their
products are marketed to the customer.
Vertical Integration – Signet has an advantage because they own
part of a diamond mind in Botswana having access as a supplier.
Declining margins from acquisitions – Signet has taken on
some companies that have lowered their margins. Until they are
able to start making revenue from the companies it will be a
weakness.
Discretionary expense – Jewelry is a luxury good so if people
decide to cut down spending and start saving it will be hurt.
Reliance on sales of credit – Since they sell expensive items
customers will put the jewelry on credit. This can lead to the risk
of customers defaulting and Signet never receiving a payment.
Regulations of the jewelry industry – the Government has set
standards that must be followed, some are very strict especially
for imported diamonds and labeling.
More financially established consumer – the marriage age has
increased over the years since consumers want to have jobs before
getting married. This is an opportunity for Signet to sell their
higher end products.
Increase in branded or exclusive jewelry – with innovation
Signet has been able to come up with jewelry exclusive to their
stores making their inventory more appealing to consumers.
Gaining market share – Signet only controls roughly 10% of the
72 billion dollar US jewelry market.
Globalization of jewelry market – Signet is already in the UK,
but has plenty of opportunity to grow and expand into other
foreign markets.
Online competition – with the advancement of the internet, online
sales of products has increased and it is affecting the jewelry
industry as well.
Foreign Exchange Risk – with the increase of the dollar sales
from the UK are not worth as much and are hurting the revenues of
the company.
Volatility in commodity prices – the price fluctuations of silver
and gold have a direct effect on the jewelry industry.
Change in consumer sentiment – the change on what people
value and what a consumer wants to spend their money on have
changed.
Consumer knowledge – people have become better about being
prepared and knowing what they want to spend on a product
without much persuasion from sales people.
0
2
4
6
Economies of Scale
Vertical Integration
Strategy
National Advertising
Campaign
In House Credit
Customer Service
Innovation and
Merchandise selections
of products
STRENGTH RATING
3
3.5
4
Strength Average
Weakness Average
Opportunities Average
Threats Average
SIGNET JEWELRS LIMITED SWOT
ANALYSIS
0
2
4
Declining margins from
numerous acquisitions
Regulations of jewelry
industry
Reliance on sales on credit
Discretionary expense
WEAKNESS RATING
0
2
4
More financially
established consumer
Globalization of jewelry
market
Gaining market share
Increase in branded or
exclusive jewelry
OPPORTUNTY RATING
0
2
4
6
Online Competition
Consumer Knowledge
Change in consumer
sentiment
Volatility in commodity
prices
Foreign Exchange Risk
THREAT RATING
19. Appendix E: Porter’s Five Forces Analysis
Threat of Entrants – LOW: There is a small number of well-known companies in the jewelry industry
making it hard for a new company to come in and compete. This causes a steep barrier to entry along with the
high start-up costs. It can cost a company millions of dollars just to stock the shelves of a small store and then
the company must have security installed as well. There are also restrictions on suppliers. The inventory may
be hard to receive right away as a new company because most of the suppliers are located in foreign countries.
There is the chance for a third party distributor, but that will cost more. The last barrier is that jewelry is
bought based on brand loyalty for most customers, so it is hard for a new company to compete with
companies that have had years to build trust.
Bargaining Power of Customers – LOW/MODERATE: There are risks and advantages in the industry
when it comes to bargaining power. On one side customers have brand loyalty and tend to stick to brands that
they know will produce quality. In sticking with high quality brands customers tend to be fine with spending
more money. On the other side, advancements in technology have made it simpler for customers to compare
prices online and know before they go to the store what they want and what price. The goal for the companies
in the industry needs to be to gain enough trust with their customers that their customers are more willing to
spend more with them.
Competitive Rivalry – MODERATE: Companies in the jewelry industry are all selling the same product.
Even though there are ways to make jewelry look different it is still the same concept. Each store has to
constantly come up with innovative ways to make their product look better than their competitors. If the
companies cannot find a way to differentiate themselves they must compete on price.
Bargaining Power of Suppliers – MODERATE: The scarcity of diamonds cause low supply and high
demand from jewelry companies. Suppliers have control because it is hard to get diamonds other than from
mines which only few suppliers own. Prices on diamonds are completely controlled by these suppliers since
the companies need them.
Threat of Substitutes – LOW: There are not many substitutes for jewelry. One thing that it can be replaced
with is green diamonds. These are recycled diamonds, usually passed down in one’s family and set differently
to make it look new. People are starting to look into these diamonds because of how scarce and expensive it
is to buy new diamonds. Other than green diamonds there is not much of a threat to the jewelry industry.
0
1
2
3
4
5
Bargaining Power
of Customers
Threat of Entrants
Threat of
Substitutes
Bargaining Power
of Suppliers
Intensity of
Competitive
Rivalry
Porter's Five Forces
Legend
No Threat to Signet 0
Insignificant threat to Signet 1
Low threat to Signet 2
Moderate threat to Signet 3
Significant threat to Signet 4
High threat to Signet 5
20. Appendix F: Relative Multiples Analysis
EV to EBITDAR Multiple
Average EV from Current EBITDAR
Multiple
$ 12,832,484,528.96
Less: Debt 1,461,300,000.00
Less: Present Value of Operating
Leases
2,477,298,593.98
Equity Value 8,893,885,934.98
Shares Outstanding 79,500,000.00 Current Trading Price (01-11-16) $ 126.18
Intrinsic Per Share Value $ 111.87 Uptrend to Valuation 12.79%
Forward EV to EBITDAR Multiple
Average EV from Forward EBITDAR
Multiple
13,733,853,235.70
Less: Debt 1,461,300,000.00
Less: Present Value of Operating
Leases
2,477,298,593.98
Equity Value 9,795,254,641.71
Shares Outstanding 79,500,000.00 Current Trading Price (01-11-16) $ 126.18
Intrinsic Per Share Value $ 123.21 Uptrend to Valuation 2.41%
Forward EV to Revenue Multiple
Average EV from Forward Revenue
Multiple
$ 11,445,818,270.23
Less: Debt 1,461,300,000.00
Equity Value 9,984,518,270.23
Shares Outstanding 79,500,000.00 Current Trading Price (01-11-16) $ 126.18
Intrinsic Per Share Value $ 125.59 Uptrend to Valuation 0.47%
Average EV from Forward EBITDA
Multiple
$ 12,580,743,949.23
Less: Debt 1,461,300,000.00
Equity Value 11,119,443,949.23
Shares Outstanding 79,500,000.00 Current Trading Price (01-11-16) $ 126.18
Intrinsic Per Share Value $ 139.87 Discount to Valuation 10.85%
Multiples
Ticker Company Market Capitalization Gross Enterprise
Value
Operating Lease
Adjusted EV
Revenue EBITDA EBITDAR
SIG
Signet
Jewelers $ 9,320,000,000.00 $ 11,186,433,000.00 $ 13,663,731,593.98 0.58 15.92 11.59
TIF
Tiffany
& Co. $ 8,170,000,000.00 $ 12,087,339,640.00 $ 13,327,951,000.27 0.35 11.23 10.18
NILE Blue Nile $ 384,970,000.00 $ 406,001,000.00 $ 414,518,040.11 1.22 22.78 21.43
Average
0.72 16.65 14.40
Median
0.58 15.92 11.59
Deviation 0.45 5.81 6.13
Various methods of multiples were calculated in order to understand the nature of multiples and to get
a better Idea about how Signet is valued.
The main multiple that was used in the valuation of Signet and the one we find most relevant is the
Forward EV/EBITDA multiple and is discussed in the report as well as the other multiple valuation
measures employed.
We also looked at various peer groups in our multiples evaluation. Some are not listed here. We looked
at companies that competed for a percentage of the consumer discretionary dollar, such as Dicks
Sporting Goods, Best Buy, and Maci’s. Signet competes against such a diverse group of competitors
not only in the jewelry industry but in the retail industry as well.
21. Appendix G: Discounted Cash Flows Model
Ap
Discounted Cash Flow Model
2016 2017 2018 2019 Terminal
SALES 6265.2 6536.4 6972.4 7390.7 7760.3 8109.5
NOPM 7.1% 464.1 495.0 524.7 551.0 575.8
NOAT 1.7 3832.8 4088.4 4333.7 4550.4 4755.2
(increase in NOA)
(469.2) (255.6) (245.3) (216.7) (204.8)
Free cash Flow
(5.1) 239.4 279.4 334.3
371.0
Add PV of terminal at end of 2019
13,345.5
Total cash flows
(5.1) 239.4 279.4 13,679.8
NPV (value of firm) $10,757.34
NOA = SE + NNO
3,363.6 2810.4
553.20
value of shares (millions) $10,204.14
# of shares (millions of
shares)
79.5
Value of each share $128.35
In the end we choose to only triangulate our results with that of Tiffany 7 Co. and Blue Nile. These
competitors represent both a slowing to declining growth company and a high growth online retailer,
respectively. Signet falls right in the middle with a CAGR of 6.67%.
Though the peer group was small we feel we did due diligence in exploring the options and limiting
our discussion and findings.
These multiple evaluations and the proceeding DCF model all point to a Hold recommendation.
Similar to the traditional dividend discount model we used a variable annual growth rate in sales.
Instead of dividends we discount our estimate of free cash flows.
The net operating profit margin was calculated by dividing NOPAT in 2015 by the Sales for that
period. We multiply NOPM by the forecasted sales in both the horizon and terminal periods. These
numbers proxy the CFO before investment in permanent NWC and CAPEX for each period.
The operating asset turnover of 1.71 was calculated using fiscal 2015 sales divided by NOA for that
period and then adjusting for the huge amount of debt that year. This number is used to approximate the
total amount of investment in operating assets required to support our estimate of sales in the horizon
and terminal period.
Increases in net operating assets are subtracted from the estimated NOPM for each year to arrive at
each year’s terminal cash flows. We use the number in the horizon period to calculate the present
values of the cash flows.
Finally, we subtract net operating obligations to obtain the total value of equity and then divide by
shares outstanding to estimate the values of each share.
25. Due to the cyclical movement of sales and the increasing magnitude of the seasonal variations, a multiplicative
decomposition model was utilized to seasonally adjust Signet’s quarterly sales. The sales were segmented into US sales,
UK sales, and total sales. The percent moving average was computed from each segment by finding the simple moving
average then the centered moving average and computing the percent change from the averages. The seasonally adjusting
index was computed from the percent moving average using the following method:
Taking the mean of the percent moving average for each respective quarter to find the unadjusted seasonal index
Finding the sum of the means then dividing four by the sum to find the adjusting factor
Taking the unadjusted seasonal index and multiplying it by the adjusting factor for each quarter to get the
seasonally adjusted index
After calculating the seasonally adjusted factor for each quarter, it was then used to divide the original sales data to find
the seasonally adjusted sales for each quester for each segment. The seasonally adjusted sales were used in all correlation
and linear regression analysis to determine economic factor relations with sales. By using these adjusted sales, the data
was smoothed over and all contaminates of seasonal patterning is mitigated. The results of the analysis are posted in
Appendix G.
Appendix I: Correlation and Multiplicative Decomposition Model
Economic Factors and their Relation to Signet Total Sales
Economic Factor Average
Growth
over 5
Years
Correlation
Coefficient
Correlation
Coefficient
with 1 Year
Lag Effect
R
Square
Variable
Intercept
Coefficient
R Square
with 1
Year Lag
Effect
Variable
Intercept
Coefficient with 1
Year Lag Effect
Employment Rate 0.24% 0.67 0.04 0.45 2.56 0.00 0.15
Personal Consumption
Expenditures
3.80% 0.76 0.17 0.57 1.71 0.03 0.39
Real Gross Domestic
Product
2.05% 0.73 0.33 0.53 1.79 0.11 0.79
Economic Factors and their Relation to Marriage Rates
Economic Factor
Average
Growth
over
5 Years
Correlation
Coefficient
Correlation
Coefficient
with 1 Year
Lag Effect
R
Square
Variable
Intercept
Coefficient
R
Square
with 1
Year
Lag
Effect
Variable
Intercept
Coefficient
with 1
Year Lag
Effect
Marriage Rate per 1,000 total
population
0.29% 100.00% - - - - -
Employment Rate 0.24% 58.82% 2.28% 34.60% 81.19% 0.05% 3.24%
Real Gross Domestic Product 2.05% 47.51% 1.17% 22.58% 53.16% 0.01% 1.30%
Real Disposable Personal Income 1.59% 23.28% -47.82% 5.42% 28.45% 22.87% -57.84%
Real Median Household Income -0.44% -6.03% 38.45% 0.36% -6.10% 14.78% 38.69%
Household Debt Service Payment As
Percentage of Disposable Personal
Income
-3.92% -11.90% -43.54% 1.42% -5.97% 18.96% -21.46%
Personal Saving Rate -2.25% -20.43% -46.01% 4.17% -1.39% 21.17% -3.08%
Student Loans Outstanding 1.77% -73.68% -68.53% 54.29% -67.82% 46.97% -83.11%
26. Economic Factors and their Relation to Personal Consumption Expenditure
Economic Factor Average
Growth over
5 Years
Correlation
Coefficient
R
Square
Variable
Intercept
Coefficient
Personal Consumption Expenditures 3.80% 100.00% - -
Real Gross Domestic
Product
0.24% 89.51% 80.12% 82.16%
Employment Rate 2.05% 73.46% 53.97% 43.68%
Personal Consumption in Relation to UK Quarterly Sales
Economic Factor
Average
Growth
over 5
Years
Correlation
Coefficient
Correlation
Coefficient
with 1 Year
Lag
R
Square
Variable
Intercept
Coefficient
R
Square
with 1
Year
Lag
Variable
Intercept
Coefficient
with 1
Year Lag
Household
Consumption
Expenditure
1.09% -0.096 0.865 0.009 -3.114 0.749 28.031
Methodology
Seasonally adjusted sales or annualized data were utilized to conduct simple linear regression
analysis and correlation coefficient calculations to reduce the risk of bias in the data models.
All simulations were conducted by using growth differentials between the yearly and quarterly
data points. This growth differential was calculated by finding the percent change between the
data points. Then correlation and linear regression analysis were conducted with the
computed points. Additionally, to see if variables have any residual effect on sales/marriage
rates, a one-year lag was included in each model.
Correlation coefficients show the strength in directional relationship between the variables. R
squared indicate the accuracy a forecast between the two variables. The variable coefficient
indicates how much the dependent variable will grow when the independent variable increases
1%.
Implications
Limited data in regression analysis for some models stands as problematic as calculations
with less than twenty-five data points have the potential to be skewed and biased. The analysis
that stands to be potentially skewed are student loans outstanding in relation with Signet’s
total sales and Household Consumption Expenditure in relation to UK Signet sales.
28. Appendix K: Diamond Sourcing Initiatives
Rio Tinto
Rio Tinto is one of the world’s largest diamond minors, producers, refiners and marketers. Through
it worldwide network of mining and production Rio Tinto maintains a strong footprint on all mining
activities. Rio’s mining activities include but are not limited 4 main product groups: Aluminum,
Copper & Coal, Diamonds & Minerals, and Iron Ore all of which are supported by their Exploration,
Technology, and Innovation Groups
“Diamantaire”
Rio Tinto partners with the world’s largest diamond companies to provide a steady stream of rough
diamonds originating from Rio Tinto’s worldwide mines.
These companies are selected for their expertise in trading, cutting, polishing, and marketing of
diamonds.
Signet gains accreditation through its multi-country jewelry retailing business as well as their
recently purchased Botswana diamond polishing center which is reflective in their vertical
integration strategy. Botswana is a strategic location being one of the world’s epicenter in the
diamond trade.
De Beers “SightHolder”
De Beers is the world’s leading Diamond Company with expertise and operations in the exploration, mining,
sale, and marketing of rough diamonds since 1888.
De Beers sells rough diamonds through two channels: Global SightHolder Sales and Auction Sales.
29. About 90% of sales are made to SightHolders, at events called “Sights”. These events occur 10 times a year at
various locations throughout the world, one of which is Botswana where Signet has recently purchased a
rough diamond polishing center and where the majority of the rough diamonds are sold to SightHolders.
SightHolders are given a term contract supply through which they must exhibit steady demand for De Beers
rough diamonds in order to maintain the status. This is something smaller retailers cannot afford to do. Many
of Signets direct competitors are not known to have these credentials. This represents a huge competitive
advantage for Signet in establishing long term diamond and commodity supply lines.
Appendix L: Global Industry Classification System
GICS – Global Industry Classification System
- Developed Jointly by MSCI and Standard and Poors
- Developed for the global investment community to simply classification and comparison.
Consisting of 10 sectors, 24 industry groups, 67 industries and 156 sub-industries.
Companies are classified quantitatively and qualitatively using revenues as a basis for classification.
Earnings and market perception are also used in the classification of securities
Covers over 27,000 companies globally and is the most complete relevant classification found by our
team.
Appendix M: Debt
Signet issued long term debt for the acquisition of Zales. Management has been effective at paying down debt
quickly which is reflected in the projected balance sheet and financial analysis. The debt was issued at very
advantages premiums as Signet seems a safe bet to most debtors. According to the company there will be no
more debt financing in the short term until this debt is payed down and the leverage is reduced.
Long-Term Debt Structure Inception Rate
Senior Unsecured notes due 2024, net of unamortized discount 398,500,000.00 5/15/2011 4.70%
Securitization Facility 600,000,000.00 5/19/2011 1.50%
Senior Unsecured term loan 365,000,000.00 5/1/2011 1.52%
Capital Lease Obligations 3,000,000.00 - -
Totals 1,366,500,000.00
